Gowex files for bankruptcy protection

September 2014 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

September 2014 Issue

Spanish wireless network provider Gowex filed for bankruptcy protection in July following the publication of a report by a firm called Gotham City Research, which alleged that Gowex was deliberately misrepresenting its accounts.

Under the terms of the company’s bankruptcy filing, Gowex now has four months to reach a deal with creditors or enter into administration. Gowex , founded in 1999, is Spain’s largest pure-play Wi-Fi company. The company services Wi-Fi contracts in a number of major markets including London, Chicago, Paris and New York. The company had intended to expand its services to around 600 cities worldwide by 2018; this now seems unlikely.

Gowex initially announced its intention to file for bankruptcy protection on 6 July after the firm found itself in a position of “imminent insolvency”. According to Spanish law firm Velez & Urbina, which is acting on Gowex’s behalf, Gowex was facing up to a “financial standstill” before its bankruptcy filing. Gowex’s financial situation has deteriorated markedly recently; this has only been exacerbated by allegations of the accounting scandal. In light of the firm’s financial difficulties, a number of contracts and projects had to be cancelled, which furthered its financial plight. The company’s bankruptcy filing followed soon after, as did the resignation of its chief executive and chairman, Jenaro Garcia Martin.

On 6 July Mr Martin announced that he had misrepresented Gowex’s financial accounts for at least the last four years. Mr Martin’s announcement came just a week after he was charged with false accounting, distortion of economic and financial information, and insider trading.

Prior to the bankruptcy filing and the resignation of Mr Martin, Gowex denied all allegations of financial wrongdoing. The firm vowed to start legal proceedings against Gotham City Research. Gotham claimed in its report into the firm’s finances that Gowex was a “charade” and that the company’s revenues were just 10 percent “at most” of those reported. Gotham put a $0 price target on the company’s stock and noted that Gowex appeared to be managing far fewer Wi-Fi hotspots than it claimed.

Gowex’s failure has come as a surprise to many. The firm had been hailed as one of the success stories of the recent Spanish economic crises. Indeed, as the Spanish economy began to emerge from its latest recession in 2013, Gowex recorded a profit of $38.19m on revenues of around $249m. The firm’s success last year was built on the strength of its business-to-business telecommunications unit and its free Wi-Fi platform. The company’s market value had ballooned 22-fold in the last two years.

Following the release of Gotham’s 93 page report, Gowex’s stock dropped 60 percent in two days, wiping $1.2bn off the company’s market value before trading was suspended. Spanish regulators also announced their intention to carry out a thorough investigation into the firm’s activities.

Before the company filed for bankruptcy, Gowex stated that it was employing the services of PwC to carry out a full, forensic audit of the firm. Gowex vowed to confirm that there was no basis to the allegations in the Gotham report; however on 6 July Mr Martin finally admitted that he had reported false accounts in the last four years.

A group of Gowex workers released a statement dated 7 July which distanced the firm’s employees from the financial scandal and noted that they were also considering legal action. The statement also announced the employees’ intention to keep the company operational for the benefit of the firm’s customer base. “We are in a state of complete shock,” noted the employee’s statement. “Workers still continue in our work posts, to keep providing service and to bring the company forward, despite the circumstances.”

The collapse of Gowex into bankruptcy is another victory for shadowy firm and short-seller Gotham City Research. The group, which lists no physical address or telephone information on its website, has previously launched campaigns against insurance software company Ebix Inc, specialty stone tile retailer the Tile Shop Holdings Inc and British software company Quindell Plc.